What are Gold Exchange Traded Funds?

Gold Exchange Traded Funds (ETFs) combine the features of stock trade and gold investments. Gold ETFs are based on the price of gold, and investments are made in gold bullion. Gold ETF transactions are made through stock brokers, who will use the money you give them to invest, to buy gold at market rates. One unit of gold ETF is equal to one gram of gold at the price that you purchased it. These units are bought and sold on the cash market of stock exchanges, just like a company stock.

How to invest in gold ETFs

To invest in gold ETFs, you need two main things:

Choose a gold ETF product/fund manager: Gold ETF products are offered by several banks and private financial institutions. Once you choose a product, your ETF fund manager will act as your stock broker on the NSE and buy and sell the gold instead of you. This process is just like trading in stocks and shares.

Open a demat account: Since gold ETF is a security that is bought and sold in electronic, dematerialised form and not in physical form, you need to have a demat account to trade in them. You can open a demat account through your stock broker or the ETF fund manager you have selected.

Features of gold ETFs

Transparency: Similar to stocks and shares, gold prices on the stock exchange are available publicly. You can know the value of your portfolio by checking the prices of gold for the day or hour.

Easy to trade: The minimum bundle or lot that you need to purchase to start trading in ETFs is 1 unit. i.e. 1 gram of gold. You can buy and sell the units through your stock broker or ETF fund manager on a daily or even hourly basis, just like equities.

Cost-effective: If you invest in a gold ETF listed on the stock exchange, there is no entry or exit load – a type of charge that is to be paid to buy or sell units. The brokerage charges are very low – 0.5 percent to 1 percent.

Lower risk: Fluctuations in gold prices are generally not as high as in equities. This means that even if your returns on equities go down, gold ETFs could act as your safety net. It will prevent you from incurring large losses.

Tax benefits: While gold ETFs attract long-term capital gains tax after one year, you do not have to pay VAT, Wealth Tax or Securities Transaction Tax on them.

Why gold ETFs are a good investment

Considering the Indian preference for investing in gold, ETFs are a good prospect if your intention is only to invest in gold and not possess the yellow metal as ornament. If you are a regular investor in the stock market, there are several reasons why you must consider gold exchange traded funds alongside your regular equity portfolio. Let us take a look at some of the key factors:

Gold is a hedge against inflation and currency fluctuations, and is generally considered a safe investment.

Investing in gold ETFs is more convenient than investing in physical gold. You don’t have to worry about secure storage or additional payments such as making charges or locker charges.

You can buy and sell gold ETFs through your stockbroker at any price, whenever you would like to. Wherever you live, gold ETFs will give you the same returns, unlike physical gold which could have different prices in different states.

You can use gold ETFs to diversify your portfolio and make it stronger. During volatile market situations, diversification helps reduce the risks of trading, and prevents heavy losses.

Risks in gold ETF investments

There are some shortcomings of gold ETFs that you need to be aware of before making your investment. Here are a few points you’d like to know:

Price fluctuations: Just like in any equity product, the Net Asset Value (NAV) of the units issued under a gold ETF can rise or fall according to economic fluctuations.

Less total returns: The additional charges – brokerage, commission or fund management fees – to maintain a gold ETF could bring down its total returns in comparison with sale of physical gold.

Compared to buying physical gold, ETFs offer guarantee of 99.5% purity and safety with regard to storage and maintenance. Experts suggest that adding gold ETF investments will make the stock portfolio more robust. You could invest 5 to 10 percent of your money on gold depending on your risk appetite, liquidity and the outlook on the price of gold.